From April 2016, CGT – which is paid on the gain when disposing of an asset such as shares and property – will be cut from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers. The first £11,000 remains tax free.
Delivering his Budget statement to the House of Commons on Wednesday 16 March 2016, Osbourne said capital gains on residential properties will be subject to an eight percent surcharge – essentially leaving landlords and other property investors at the original higher rate.
This is the third Budget which directly attacks landlords. Prior announcements include:-
Announced last year, individuals and corporates purchasing a buy-to-let or an additional property will have to pay an additional 3% in Stamp Duty on top of the existing rates. From 1 April 2016, the stamp duty bill on a buy-to-let property costing £250,000 will jump from £2,500 to £8,800.
Currently, no stamp duty is payable on the first £125,000 of a property’s price. From there 2% is paid on the amount up to £250,000; 5% up to £925,000; 10% up to £1.5 million and 12% on anything beyond that. View our stamp duty calculator.
A consultation released in January mentioned corporates or funds with 15 or more residential properties may be exempt from the surcharge however the Budget document released yesterday confirmed: “There will be no exemption from the higher rates for significant investors, and the higher rates will apply equally to purchases by individuals and corporate investors.”
Removal of Mortgage Interest Tax Relief
Last year, Osborne also announced major plans to restrict tax breaks for residential buy-to-let landlords which would see half of their profits wiped out.
Gradually being phased in over 4 years from April 2017 the change means mortgage interest payments will be restricted to just 20% of interest.
Under current rules, a 45% taxpayer with an annual net rental income of £21,000 and annual mortgage interest of £10,000 would profit £6,050 after tax. This could be cut to just £3,550 under the proposed plans once the rules have been fully implemented.
Buy-to-let landlords will also be hit by a change in Capital Gains Tax (CGT) payment rules. From April 2019, they will have to pay any CGT due within 30 days of selling the property. Currently individuals have up to 21 months after the sale of a property to pay CGT. The government will also consult in 2016 on changing the SDLT filing and payment window from 30 days to 14 days. The wear and tear allowance will also be abolished from April 2016. Landlords will be able to deduct the actual costs of replacing furnishings. The Annual Tax on Enveloped Dwellings (ATED) threshold has also been reduced to £500,000.
Analysis by accountancy firm Jeffreys Henry LLP shows higher and additional rate tax paying investors could potentially benefit by holding property with rental income in a limited company.
Not only can limited companies offset the full mortgage interest payments against its tax bill, rental profits are taxed at the corporation tax rate of 20%, as opposed to up to 45% if held personally. Corporation tax rate will fall to 19% in 2017 and 17% by 2020.
Holding investment property in a limited company is not suitable for every landlord and careful planning is required before taking any action.
With significant tax changes already announced, with potentially more to come, it is vital buy-to-let landlords and other property investors seek professional tax advice.
Jeffreys Henry LLP is one of the UK’s leading Property Tax Specialists with clients including buy-to-let landlords with 5+ properties, property investors, developers, housing associations and related businesses such as chartered surveyors, architects, consulting engineers and estate agents.